The following summary of leasing terms is provided to assist our clients and is intended to be used for tutorial purposed only. We recommend that the reader consult with his/her legal advisor or accountant before taking any action as a result of information provided below.

We welcome any corrections or additions to our glossary of lease terms and would consider any recommendation as to how we can improve our information. Please email us at documents@Acubids.com with your comments.

Ad Valorem Tax

A tax based on the assigned value (actual or assessed) of the real property by a state or local government. Tax based on the value of real property as determined by the county tax assessor.

Advanced Refunded

A municipality may prepay a lease at any time under the "option to purchase" clause of the lease agreement. The municipality may put the existing lease out for a "Request for Bid". If the payments are substantially lower, a second tax-exempt lease may be executed placing the proceeds of the Refunding lease into an escrow account from which the first lease's principal, interest and prepayment penalty will be paid on the next optional call date (most often the next payment date). Generally, a two percent (2%) present value savings or greater is considered a feasible refunding.

Advance Refunding

The replacement of debt prior to the original call date via the issuance of refunding bonds or leases.

Accredited Investor

1. Any bank as defined in section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any insurance company as defined in section 2(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;
2. Any private business development company as defined in section 202(a)22 of the Investment Advisers Act of 1940;
3. Any organization described in section 501(c)3 of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;
4. Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;
5. Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000;
6. Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;
7. Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii); and
8. Any entity in which all of the equity owners are accredited investors.

Agent

A Lease transaction (Request for bid) submitted by a third party (agent) on behalf of and under the instruction of the principal party. The Agent does not act in a principal capacity and may be compensated by commission or fee (which must be disclosed to the party for whom it is acting) rather than by a mark up or additional fee charged direct to the lessee. To function as a lessee agent the agent must be designated by the lessee and authorized to act on their behalf in entering information for a "Request For Bid" and submitting this information to the proposed bidders.

AMBAC

AMBAC Indemnity Corp., is the number two-ranked insurer of tax-exempt debt.

Annual Appropriation

A legal commitment by a lessee to annually ratify the lease agreement and to budget the following years scheduled payment.

Covenant Arbitrage

Arbitrage usually refers to the difference between the interest rate on the tax-exempt lease obligation and the taxable interest earned by investing the lease proceeds in higher yielding taxable securities. The Internal Revenue Service regulations govern arbitrage on the proceeds from issuance of municipal debt. Reference: IRS. Reg. 1.103-13 through 1.103-15.

Generally if proceeds from the sale of a lease are not used to fund the equipment acquisition directly, but instead deposited into an escrow or acquisition account and subsequently invested at a taxable rate of interest the lessor may request an Arbitrage Certificate executed by the lessee.

Arbitrage Violations

If proceeds are deemed by the IRS to have violated federal arbitrage regulations the interest on the lease becomes taxable and therefore must be included in the lessor's gross income for federal income tax purposes.

AMBAC

AMBAC Indemnity Corporation ("American Municipal Bonds Assurance Corporation", the original name of the corporation) offers noncancellable insurance contracts by which it agrees to pay all, or any part, of scheduled principal and interest payments on the debt as they become due and payable, in the event that the issuer is unable to pay. Debt insured by AMBAC is currently rated AAA by Standard & Poor's.

Assignment

Leases will contain a provision to allow the lessor to assign a lease agreement to another party. The ability to assign a lease agreement will enhances the liquidly and subsequently lowers the interest rate of the lease contract. It will also allow a lessor to assign the lease to a qualified lease servicer or trustee to create a pool of leases of similar characteristic's to remarket as a "Certificate of "Participation" in a pool of leases.

Assessed Valuation

A municipality's worth in dollars based on real estate and/or other property for the purpose of taxation, sometimes expressed as a percent of the full market value of the community.

Audit Report

A report prepared by an auditor following his audit of the financial position and results of operations for a given period of time. The Audit Report should contain a statement of the scope of the audit explanatory comments concerning exceptions from generally accepted accounting principles and auditing standards, expression or disclaimer of opinions, explanatory comments concerning verification procedures, financial statements and schedules and statistical tables, supplementary comments and recommendations. Signed by the Auditor.

Authority or Agency

A state or local unit of government created to perform a single activity or a limited group of functions and authorized by the state legislature to issue bonded debt. Authorities are usually financed by fees, tolls or service charges, although it may also have taxing powers. An Authority may operate independently of other governmental agencies, or it may depend upon other agencies for its creation, funding or administrative oversight. Examples of authorities include health facilities authorities, industrial development authorities turnpike authorities or utility authorities.

Authority

Not all private activity debt issuers meet the definition of a political subdivision. Often the political subdivision will establish a trust authority to act a conduit to issue the debt and enter into a sublease to provide revenue to meet the payment requirements.

Basis Point

A basis point is the equivalent to one hundredth of one percentage point or 0.01%. An example would be if a lessee received one bid at 6.00% and another at 5.94%, there would be 6 basis points spread between the two bids. 100 basis points equal one percent.

Bid

An offer to fund a lease at a fixed price or rate. As opposed to Ask, which is an offering to sell.

Bid Form

An electronic or hard copy form that generally includes the notice of "request for bid", to be completed by the lessor interested in submitting a bid on the new lease. The lessor will fill in the blank specifying the interest rate and any other terms or conditions the he would require before funding the new lease. (Subject to any conditions stated by the lessee in the "Request For Bid")

Bid Wanted

A listing of a lease on which the listing lease owner provides the stated interest rate on the existing lease but does not show a price. The lease owner is soliciting bids from other lessor's interested in purchasing the lease.

BIGI

Bond Investors Guaranty Insurance Company.

Bond Fund (Tax-Exempt)

A portfolio of municipal tax exempt debt sponsored by registered investment companies that offer shares to investors in a managed portfolio of municipal leases or bonds whose size will vary as shares are purchased or redeemed.

Budget

An estimate of proposed expenditures for a given period of time, normally for the next fiscal year. Budgets are prepared by staff and administrators and presented to the governing body for approval.

Capital Lease

A Capital Lease is often referred to as a Lease With Option to Purchase. A Capital Lease is an acquiring Lease that allows for the installment purchase of an asset over its useful life with all of the benefits and risks incidental to the ownership of the asset. Capital Leases are governed by a combination of common law, personal property law and those parts of the Uniform Commercial Code which deal with sales and secured transactions. The distinction between its Operating Lease (rental of an asset) and a Capital lease (conditional sale of an asset) is ownership. To meet the criteria for accounting standards established by the Financial Accounting Standards Board under Statement No. 13 "Accounting for Leasees" any one of the following must be met:

• The lessor (Lender) transfers ownership of the asset to the lessee Borrower) at the end of the lease term.
• The lease contains an option to purchase the asset at a nominal price. Typically $1.00 at the end of the lease term.
• The lease term is equal to 75% or more of the economic life of the asset.
• The present value of minimum lease rental payments is equal to 90% or more of the fair market value of the leased asset.
• The lessor transfers ownership to the lessee at the end of the lease term.
• The lease contains an option to purchase the asset as a bargain price.
• The lease term is equal to 75% or more of the economic life of the property. The present value of minimum lease rental payments is equal to 90% or more of the fair market value of the leased asset.

Cascading Lease(r)

To meet the specific needs of our municipal government clients, Acubids.com has developed a proprietary lease called a Cascading Lease(r) which is a variation of a Master Lease.

Lease purchasing of Qualified Information Technology (QIT) is a challenging task for most governmental finance managers. Buying, financing and replacing obsolete computers and software is a vicious circle. The useful life is determined in part by the speed of technology and software development.

Although still subject to annual appropriation, Cascading Lease(r) financing is a solution to the QIT superannuated problem. Cascading Leases are for a term of up to 10 years (some issuers are limited to 5-year terms or other terms as determined by statute). The incremental rate of interest will float each two or three-years in relationship to the two or three year U.S. Treasury Note market. The payment term will be on a one-year post cycle, meaning the lessee may finance one year longer than it anticipates keeping the equipment. The lessee will have the option of rolling the QIT into new replacement technology at the end of year two or three or in the alternative, continuing the lease one additional year. The lessee may elect to kept the equipment and continue making the payment for one additional year or terminating the lease by paying the purchase option price at any time.

When the lessee elects to upgrade (in year two or three), the trade in value from the vendor, reseller, (or other) will be applied to the principal remaining on the lease. The lessee will have the option to pay a deficiency (if any) or apply any excess value to the Cascading Lease(r). The lease will be adjusted to meet the need of the new QIT and the payment will be recalculated. This will continue for the full term of the Cascading Lease(r) .

If the lessee chose to replace the equipment at the end of year 2, the equipment value should be substantially more than at the end of year 3 or year 4. Regardless, the new replacement equipment cost, less the trade-in or resale value is applied to the ending balance and the Cascading Lease(r) and the payment will be recalculated for the following incremental term.

Certificates of Participation

Also referred to as COP's are a form of securitizing and dividing a flow of lease payments, installment payments or loan payments relating to the acquisition of land and equipment or construction of specific facilities. The Certificate's are sold to investors in various maturities at various rates. Once a lease or a pool of leases has been securitized it becomes a security as defined by the Securities and Exchange Commission. A COP's offering must meet all of the security requirements and are typically issued in denominations of $100,000.00. Following the voter approval of Proposition 13 by the voters in California, tax exempt leasing with annual appropriations became the financing tool of choice because COP issuance does not require voter approval. Only the current years appropriation requirement is considered "debt". COP's are seen by rating agencies as a weaker security and often carry ratings that are a notch below the issuer's general obligation rating.

Certificate of Acceptance

The Certificate of Acceptance is typically made a part of the lease agreement and is attached as an exhibit. The statement to be executed by the lessee acknowledges that the equipment, subject to the lease has been delivered and accepted for purposes of the lease and is functioning in accordance with the vendors specifications. The date of the Certificate of Acceptance may also be the same date as the "dated date" of the lease agreement.

Continuing Disclosure

The Securites Exchange Commission Rule 15c2-12 requires all municipality that have outstanding bond debt to keep Official Statements, quarterly and annual financial statements and all "material events" on file with one of five designated Nationally Recognized Municipal Securities Information Repository (NRMSIR).

Customized Lease

Any lease may be modified for a specific reason. The reasons may include a special feature such as ascending or descending payments over the live of the asset, or a seasonal payment that matches the customer's cash flow fluctuations.

Covenant

A legally binding commitment by the issuer of municipal bonds to the bondholder. The violation of a covenant can lead to a Technical Default.

Dated Date

The date entered on the front of a lease document or an exhibit attached thereto, normally the same date that interest will begin to accrue.

Debt Ratio

The ratio of the issuer's general obligation and current years lease obligations debt to a measure of property value, such as real property valuations, personal property or general fund resources.

Debt Service

The amount of funds required to make payments for principal and interest.

Debt Limits

The maximum amount of debt a lessee may incur in relationship to the tax base (assessed value) or under constitutional, statutory or charter provisions.

Debt Ratio

Analysis considers the relationship between the lessee's outstanding debt and its tax base, population and other factors. Ratios are used to determine the legal and financial capacity of a municipal government. The analysis will consider net debt to assessed valuation, net debt of appraised valuation and net overall debt per capita.

Default

A breach of one or more covenants of the lease agreement. The most serious default occurs when the issuer fails to pay principal, interest, or both, when due. Other defaults might be defined as technical defaults when certain covenants are not followed. Technical defaults may be a failure to maintain insurance. These technical defaults are normally cured with no noticeable interruption in payments. Lessor may exercise legal remedies available and enforce the lease agreement.

Defeasance

Refunded municipal or federal government debt for which the payment of principal and interest has been assured through the structuring of a portfolio of government bonds or State and Local Government Securities (SLUG's) or invested in other qualified investment obligations approved by the issuer. Defeasance is usually accomplished through the issuance of a new series of debt.

Delivery

The date on which the final executed documents and resolutions are delivered to the lessor. Secondary market delivery is the date on which the final executed documents and resolutions along with a properly executed assignment are delivered to the purchaser of the lease agreement. The delivery date of the documents should not be confused with the delivery and acceptance date of the land or equipment being financed

Direct Debt

General Obligation and appropriated lease debt issued by a local unit of government or issued by any underlying agency or annexation of the issuer.

Direct Financing Lease

A lease, which the lessor recovers from the lessee through the lease payments without any reliance upon the residual value of the equipment. The lease is noncancellable and the lessee takes responsibility for the maintenance and insurance of the equipment.

Doctrine of Reciprocal Immunity

This doctrine provides the constitutional basis for the federal income tax exemption on interest paid on municipal securities. The doctrine provides that state's nor the federal government may tax income received from securities issued by the other.

Drawdown Schedule

An estimated schedule of property or equipment payments which anticipate the periodic payments, or "draw" to which the contractor is entitled at progressive stages of completion.

Economic Lease

The Lease of an asset for the purpose of capitalization and depreciation.

Essential Use

Land or equipment used by a government that is considered necessary for the operations of the government operations.

Exempt Transactions

Government leasing is an exempt transaction not subject to registration requirements of the Securities Act of 1933 or the reporting requirements of the Securities Exchange Act of 1934. In general, obligations of the United States Government, federal agencies, states, municipalities or other political subdivisions are exempt from such requirements. Reference; 15 United States Code 77 (c) (2).

Factoring

Factoring is a method of converting an interest rate into a simple factor that can be multiplied times the principal amount of the asset being purchased to give a monthly payment. Factoring is a method often used to mask the actual rate of interest being charged to the lessee (borrower) and is strictly prohibited from being used on Acubids.com.

FGIC

Financial Guaranty Insurance Co., is the number three-ranked insurer of tax-exempt debt.

Financial Advisor

Generally an independent consulting firm or an investment banking company that advises the issuer on all financial matters pertaining to a proposed debt issue and is not part of the underwriting syndicate.

Financial Statement

Form required by the Uniform Commercial Code to be filed with the UCC-1 in one or more public records office in order to perfect a security interest in the leased property.

Fiscal Year

Twelve-month time period which state and local governments annually budget their respective revenues and expenditures and the results of operation of the prior year are determined. The Fiscal Year is usually not the calendar year, but most often the month ending June 30th.

Fitch Investors Service

An independent service company based in New York City, which provides ratings for municipal debt and other financial information to subscribers.

Floating Rate or Variable Rate

The interest rate on a debt may change at intervals according to an index or a formula or other standards of measurement as stated in the lease agreement. One common method is to calculate the interest rate as a percentage of the rate on Treasury securities of similar maturities. An example would be a 30-day floating lease rate that is indexed as a percentage of the 30 T-Bill rate.

FSA

Financial Security Assurance Inc., is the fourth-ranked insurer of municipal debt.

Financial Guaranty Insurance Company

FGIC is a subsidiary of FGIC Corporation which offers non-cancellable insurance guarantying the full payment of principal and interest on municipal debt. FGIC is owned by six share-holder companies: General Electric Credit Corporation; General Re Corporation; J.P. Morgan & Co. Incorporated; Lumbermen's Mutual Casualty Company; Merrill Lynch & Co., Inc.; and Shearson Smith Barney, Inc. Debt insured by FGIC are currently rated AAA by Standard & Poor's and Aaa by Moody's Investors Service, Inc.

Governmental Accounting Standard Board

Is a standard-setting body, associated with the Financial Accounting Foundation and comparable to the Financial Accounting Standards Board, which prescribes standard accounting practices for governmental units in maintaining their financial records and releasing financial data to the public.

Government Finance Officers Association

GFOA is an organization of state and local government finance officers formed to improve professional standards of government fiscal and debt administration. The organization was formerly named the Municipal Finance Officers Association.

Health Industry Bond Insurance

HIBI is an insurance program sponsored by Industrial Indemnity Company and American Health Capital HIBI Management, Inc., to provide insurance for the qualifying not-for-profit 501 (c) (3) health care institutions. HIBI insured debt is currently rated AAA by Standard & Poor's.

Industrial Development Debt

Used to finance facilities for private enterprises, water and air pollution control, resource-recovery plants and manufacturing plant and equipment. The debt is backed by the credit of the private corporation borrower and issued through a trust Authority acting as a conduit issuer with the sublease payments passed through to the lessor or lender. The credit of the Authority is not pledged and the payments are made only to the extent they are received by the Authority. Industrial Development Debt is subject to each states volume cap.

Interim Borrowing

Short-term loans to a government used to acquire land or equipment that is considered essential governmental purpose. And the borrower reasonable anticipates to be repaid from general revenues or tax collections during the current fiscal year or the issuance of a tax-exempt lease or bond issue.

Investment Banker

A firm engaged providing financial advisory services or underwriting of bonds. Participates as the middleman in purchasing securities from the issuer and in selling the same securities to investors.

Investment Grade

Government debt issues that are rated in one of the top four rating categories by any one or all of the major bond rating agencies, or would otherwise qualify for a rating from Moody's, Standard & Poor's, and Fitch rating of BBB or Baa or better. Many portfolio managers can only invest in securities with an investment grade rating.

IRS Form 8038

All tax-exempt leases entered into by a government lessee require that the appropriate federal tax form be filed. On obligations of less than $100,000 the lessee must file an 8038 G and on obligations of $100,000 or more the lessee must file an 8038 CG. Forms must be filed within 45 days of the funding date. Failure to file this form can result in the interest component of the lease loosing its tax-exempt status.

Issuer

A state or local unit of government that borrows money through the sale of leases, bonds or notes.

Lease-Rental Debt

Leases or Bonds whose principal and interest are payable exclusively from rental payments from a lessee. Lease-Rental payments may be derived from earnings of an enterprise that may be operated by the lessee. Such as golf courses and parking garages. Rental payments may also be derived from taxes levied by the lessee.

Lessee Agent

A Lease Agent transaction executed by a third party on behalf of and under the instruction of another party. The Agent does not act in a principal capacity and may be compensated by commission or fee (which must be disclosed to the party for whom it is acting) rather than by a mark up or additional fee charged direct to the lessee. To function as a lessee agent the agent must be designated by the lessee and authorized to act on their behalf in entering information for a "Request For Bid" and submitting this information to the proposed bidders.

Lease Offerings

A lease awarded to a lessor and is being advertised for sale or assignment to other interested lessor's. The lease offering may be a new issue, not yet funded, or a lease that has been funded but has payment obligations outstanding.

Legal Opinion

An Opinion of Legal Counsel that a lease was duly authorized and issued. The opinion usually includes the statement, "interest earned is exempt from federal taxes and, in certain circumstances, from state and local taxes."

Lessee

The party to the lease agreement who is obligated to pay the lease payments and perform other duties. The lessee is deemed the owner and title-holder of the property or equipment being acquired under a lease-purchase agreement.

Lessor

The Lessor is the party to the lease agreement who has agreed to purchase and enter into a conditional sales agreement on the leased property to the lessee.

Letter of Credit

LOC's are a popular method of credit enhancing a week or non-rated credit. LOC's may be attached to a lease giving the lease a rating as high as the commercial bank or private-corporation who is guarantying principal and interest payments on the lease under certain specified conditions.

Lien

A claim on a financing statement or revenues, assessments or taxes made for a specific issue of bonds.

Limited Tax Bond

A lease or bond secured by a pledge of a tax that is limited as to assessment rate or amount.

Liquidity

The quality of being easily convertible into cash without substantial transaction cost. A lease's liquidity is a function of the term, frequency of payments and marketability.

Liquidity Facility

In addition to offering Letters of Credit, banks may also offer to act as a Liquidity Facility for a pool of municipal debt that will assure the Put Option Certificate holder of a ready market.

Master Lease

Master Lease Agreements are similar to a line of credit where the total principal may be estimated but unknown at the time of entering into the lease arrangement. A Lessee (Borrower) may add new equipment under the same basic terms as set forth in the original lease agreement. This program can enable a municipality to address unforeseen needs and aid in the development of long-term purchasing plans.

Similar to a Capital Lease, a Master Lease is an acquiring lease that allows for the installment purchase of an asset over its useful life with all of the benefits and risks incidental to the ownership of the asset. Capital Leases are governed by a combination of common law, personal property law and those parts of the Uniform Commercial Code which deal with sales and secured transactions. The distinction between its Operating Lease (rental of an asset) and a Capital lease (conditional sale of an asset) is ownership. To meet the criteria for accounting standards established by the Financial Accounting Standards Board under Statement No. 13 "Accounting for Leasees" any one of the following must be met:

• The lessor (Lender) transfers ownership of the asset to the lessee Borrower) at the end of the lease term.
• The lease contains an option to purchase the asset at a nominal price. (Typically $1.00 at the end of the lease term).
• The lease term is equal to 75% or more of the economic life of the asset.
• The present value of minimum lease rental payments is equal to 90% or more of the fair market value of the leased asset.

Maturity

The last date on which the principal of a municipal or federal government lease is due.

MBIA

Municipal Bond Insurance Association is an association of five insurance companies (The Aetna Casualty & Surety Co., Fireman's Fund Insurance Companies, The Travelers Indemnity Company, CIGNA Corporation, and The Continental Insurance Company) MBIA Insurance Corp., is the largest insurer of tax-exempt debt, based on insurance in force and market penetration.

Municipal Lease

An installment sales contract presented in the form of a lease and only available to municipal government. Interest earned is excluded from federal taxation.

Net Assessed Value

Net Assessed Value (NAV) generally is a method used when determining a county equalization table of assessed value as compared to actual value of real property. Net valuation on which county taxed are apportioned. Generally tax rate to apply to $100.00 of valuation.

Net Bonded Debt

Gross general obligation debt less self-supporting general obligation debt, housing bonds, water revenue bonds, etc. Net Interest Cost (NIC) generally speaking, issuers award competitive bond sales to the underwriter bidding the lowest NIC. It represents the average coupon rate weighted to reflect the time until repayment of principal and adjusted for the premium or discount.

Net Lease

A lease agreement with a provision that require the lessee to maintain insurance, maintenance, and assume responsibility for any taxes on the leased property or equipment.

Non-Appropriation

A lease agreement must contain a non-appropriation Clause. The lessee may cancel without penalty of the lease agreement at the end of a fiscal year, if the lessee is unable to obtain appropriation for funds to meet the following annual lease payment, or the governing body fails to ratify the lease agreement.

Non-substitution

A lease agreement may contain a non-substitution Clause that if the lease is cancelled for non-appropriation, the lessee is prohibited from replacing the leased equipment with similar or like equipment for the purpose of performing the same function.

Off Balance Sheet Lease

A common term used to describe an Operating Lease.

Operating Lease

A Lease (referred at times as a "Off-Balance Sheet Financing") that does not transfer substantially all of the benefits and risks incidental to the ownership of property should be accounted for as an Operating Lease. The operating lease criteria is contained in the Statement of Financial Accounting Standards (SFAS No. 13). The Four characteristics of an operating lease are; 1) legal title will not transfer, 2) no bargain purchase option, 3) the lease term will not exceed 75% of the assets economic useful life, and 4) the Present Value of the minimum lease payments will not exceed 89.5% of the Fair Market Value.

Overlapping Debt

The general obligation, revenue or current years lease obligation of larger units of government overlapping an issuer's jurisdiction.

Per Capita Debt

Analysis frequently consider the amount of per capita debt when evaluation the credit of a debt issued by a municipality. Per Capita Debt is computed by adding all of the municipality's debt outstanding and dividing by the population residing in the municipality.

Pollution Control Debt

A state or local authority may issue industrial development debt to finance the acquisition of pollution control equipment by a corporation. The security for a pollution control debt is the payments from the corporation under an agreement for sub-leasing the equipment.

Pooled Financing

A financing where one large issue of bonds is issued and subsequently loaned to two or more governmental units or other persons.

Prepayment Option

Most leases contain a provision that will allow the lessor to pay a lease off at any time. Payment schedules are typically attached to the lease agreement with an option price following the current payment due.

Primary Market

The new issue market.

Principal

The amount funded as set out in the executed lease and payment schedule attached thereto, exclusive of interest.

Private Activity Bonds

The Tax Reform Act of 1986 describes a Private Activity Bond where the proceeds are used in a trade or business of a private entity or secured by revenues from a private entity, and includes 501 (c) (3) bonds as well as classic Industrial Development Bonds (IDB).

Rate

A measure of the specified annual interest rate payable to the leaseholder. The amount of annual interest paid on a lease divided by the price.

Ratings

An analysis of the ability of a lessee to repay debt based upon an evaluation of his creditworthiness. Standard & Poor's and Fitch Investors Service Inc. use the same system, starting with their highest rating of AAA, AA, A, BBB, BB, B, CCC, CC, C, and D for default. Moody's Investors Services uses Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C, and D. Each of the services use + or - or +1 to indicate half steps in between. The top four grades are considered Investment Grade Ratings. Some financial institutions also assign their own financial ratings to a lease.

Refunding

An issuer may choose to issue a new lease or pay from operating funds an outstanding lease that has not reached its stated maturity or due date. If the lessee issues a new lease it would be referred to as a refunding lease. See "Prepayment Option".

Resolution

A document in which the lessee authorizes the issuance and sale of municipal debt. Putting a lease out for a "request for bid" is usually approved in the authorizing resolution, and the award is often authorized in a separate resolution authorizing the legally designated person to enter into and execute the lease.

Risk Insurance

Either the issuer or buyer of a lease may purchase Insurance issued by a private insurance company that guarantees to pay principal and interest when due. This will provide a credit rating of triple-A and thus a lower borrowing cost for the issuer. The four largest bond insurers are AMBAC, FGIC, FSA and MBIA.

Secondary Market

Once issued, documents executed, asset accepted by the lessee and payment or payments begin, a lease may be resold or remarketed in the secondary market. The assignment provision of a lease allows the lessor to sell or assign his rights to receive rental payment to a third party. This provides a form of liquidity that is important to the lessor. The trading market for outstanding lease has traditionally been by telephone and a limited Internet market. As many as $2 billion of municipal leases and governmental bond issues trade each day.

Standard & Poor's Corporation

An independent financial service company who provides ratings for government debt and provides financial information to subscribers.

Synthetic Lease

A Synthetic Lease is a tax and accounting lease and is not often used by municipal or federal government. The largest State and Local Government users of Synthetic Leases are Certain Qualified Private Activity lessees such as hospitals. State or Local Trust Authorities are used as lessor and provide a conduit to allow the interest rate to be tax-exempt.

The Synthetic Lease represents the best of both worlds. An operating lease for accounting purposes (off balance sheet) and a Capital lease for US tax purposes. The tax code does not follow the accounting principals.

To follow the tax code, additional conditions need to be met:

• A minimum risk to the lessor of 20% of the property's cost;
• Lessee purchase option not less than the Fair Market Value as of the option exercise date;
• Minimum lease term of 80% of the useful life of the property;
• Minimum estimated Residual Value of 20% of the original cost;
• Use of the asset by persons other than the lessee is commercially feasible at the end of the lease period;
• Apart from tax benefits, positive Cash Flow and profit for the lessor are required.

The U.S. tax criteria for a Capital lease is more stringent than the standards established by the Financial Accounting Standards Board under Statement No. 13 "Accounting for Lessees" ("FASB 13"). An Operating Lease under FASB-13 is not, by definition, an Operating Lease for US tax purposes.

On tax-exempt synthetic leases State and Local Trust Authority will act as lessor, hold title and depreciation will not be considered. Lease rentals are not taxable income for the public trust.

On taxable synthetic leases, it is the lessor who is entitled to the tax benefits of depreciation (Cost Recovery). Depreciation is based upon the Modified Accelerated Cost Recovery System, which, in 1986 replaced the Accelerated Cost Recovery System. Depending on its class life under the Asset Depreciation Range System, equipment is depreciated over a three, five, seven, or a ten-year period. Lease rentals are taxable income for the lessor, whereas the lessee is allowed to deduct the lease rentals from its taxable income

Security Agreement

An agreement that provides for a security interest under the Uniform Commercial Code.

Security Interest

Interest in real property or equipment securing payment or performance of a debt obligation.

Special Assessment Debt

Debt whose repayment is the responsibility of the business or developer who benefits from the financing, (most often used for streets, curbs, gutters, water or sewer systems, etc.) rather than the issuer who only collects the taxes, fees or revenues and passes them on to the debt holder. Assessments are levied on all the properties in the district in proportion to the benefit to the property owner derived from the improvement. Debt is issued without voter approval and repaid from the special assessments received. Each specific property will have a lien in the event of default. Many property owners in special assessment districts elect to pay their entire assessment at the time of acquiring the property to avoid title problems.

Tax-Exempt Lease

A financing agreement entered into by a state or possession of the United States, the District of Columbia, a political subdivision, or a 501 (c) (3) organization thereof. The interest component of the rental payments made by the lessee are excludable from lessor's gross income for federal income tax purposes pursuant to Section 103 of the Internal Revenue Code. If the lease is exempt from state income tax, it possesses a "double tax-exempt" status and "triple tax-exempt" in some state where local income taxes are assessed.

Taxable Equivalent Yield

The taxable equivalent yield is equal to the tax-free yield divided by the sum of 100 minus the individual or corporate tax bracket. For example the taxable equivalent yield of a 6.00% tax-exempt lease for someone in the 32% tax bracket would be: 6.00 ÷ (100-32) = 9.00%.

Technical Default

Failure by the issuer to meet the requirements of a lease agreement covenant. These defaults do not necessarily result in losses to the leaseholder. The default may be cured by simple changes of policy or actions by the issuer.

Transcript

The lessee will normally prepare a transcript containing all legal documents, copies of the UCC-1 filing, the 8038 filing, minutes of appropriate meeting, insurance certificate and other related documents. A copy of the transcript will normally be provided to the lessee.

Treasury Securities

U.S. Treasury Securities are full faith and credit obligations of the United States of America. Treasury Securities are considered the highest quality of investment being rated AAA by all of the rating agencies. Treasury debt is issued in multi-term format with Treasury Bill being 1 year or less in maturity, Notes being 1 to 10 years in maturity, and Bonds being 10 years or more.

Treasury Securities Indexing

Lessor's may elect to request bidders to bid an interest rate as compared to U.S. Treasury Securities. If the lessor reasonable expects a delay in the delivery and acceptance of the asset being financed he may choose to accept interest rate bids as compared to a U.S. Treasuries of a similar term. This would protect both the lessee and lessor from dramatic market rate swings.

True Lease

For federal tax purposes, a lease which permits the lessor to claim the tax benefits of ownership on the leased property or equipment. Rental payments received by the lessor are considered taxable income. The lessee is able to claim rental payments as tax deductions. Also know as a fair market value lease.

Trustee

Leases, which are securitized and marketed a COP's will use the services of a bank designated as the custodian of funds and official representative of leaseholders. Trustees are appointed to insure compliance with the lease agreement and trust indenture and represents Certificate holders to enforce their contract with the lessee.

UCC-1

To perfect a security interest in the equipment a Uniform Commercial Code (UCC-1) Financing Statement must be signed by the lessee as debtor and the lessee as the lender or assignee and filed with the appropriate public records office. Upon receiving the last and final payment the lessor is required to file a lien release.

Useful Life

The period of time equipment may be used with normal repairs and maintenance.

Variable Rate or Floating Rate

The interest rate on a debt may change at intervals according to an index or a formula or other standard of measurement as stated in the lease agreement. One common method is to calculate the interest rate as a percentage of the rate on Treasury securities of similar maturities. An example would be a 30-day floating lease rate that is indexed as a percentage of the 30 T-Bill rate.